Five examples why “discount culture” is killing our economy

Everyone loves a good deal, right? What’s wrong with that? Alas, if you care about fostering real product innovation, if you care about building vibrant American enterprises which pay a true living wage to their workers, and if you care about preserving true consumer choice and competition–there’s a whole lot wrong with the American obsession with getting a “great deal.”

I’ve been walking around, feeling somewhat like a Lorax-like “Save the Trees” person, worrying about this idea. I didn’t even have words for my concerns. After all, cheap prices are an American birthright, no? And then I tripped on the great book Cheap, by Ellen Ruppel Shell. I started reading it yesterday. Her messages are so important that I won’t wait to finish the book to begin sharing them. She needs to be heard and understood by anyone who buys anything. Consumer purchases drive 65% of our economy. I consider the discussion of discount culture to be as important as fixing health care, in our economic recovery. And the discussion goes way beyond economics, to the very quality of life.

Here are some excerpts straight from the first chapters of Cheap:

This first fact is just plain appalling. Read this and weep. ” Factory outlets are America’s number-one tourist destination.” Really? Is getting 50% off of a Banana Republic shirt more compelling than Mount Rushmore? Oh the pain.

Design used as subterfuge, in creating a disposable society. “In the world of Cheap, “design” has become a stand-in for quality, Companies such as H & M and Zara offer consumers the look they love at a price they can live with–but at what true cost?….the genius of IKEA and other cheap-chic purveyors is that they have made fashionable, desirable, and even lovable objects nearly devoid of craftsmanship. The environmental and social implications of this are insidious and alarming.”

We no longer associate real costs and real jobs with prices at retail. Americans habitually fret that we are paying too much. We think paying full price is a sucker’s game. “From Lisa Bolton, a professor at Wharton: “‘There is good reason for this confusion. Most of us have absolutely no idea of what goes into setting a price. Consumers don’t think about the costs behind what they buy. They link price to profit, and they grossly overestimate profit margins.'”

But we are paying less than ever. ” The fear of inflation-driven price hikes is so deeply ingrained in the national psyche that many of us believe we pay far more for goods and services than our parents or grandparents. We barely notice that prices of most consumer goods–even food and fuel–have been trending downward for decades. The rather astounding facts are these: Compared with the early 1970’s, in 2007 we spent 32 percent less on clothes, 18 percent less on food, 52 percent less on appliances, and 24 percent less on owning and maintaining a car.” (I used to sew a lot of my own clothes, until the early ’80’s. It just doesn’t make sense, economically, any more. Clothes are dirt cheap.)

“Technology-driven globalization has pushed real prices to rock bottom in almost every category–a trend that verged on the desperate in late 2008 when even tony retailers such as Saks and Nordstrom engaged in an orgy of price slashing so extreme that it threatened to tarnish the reputation of their own brands.”

I know, I know. About now you are thinking, free markets prevail. The strong survive. They are the ones who deserve to prosper. This notion is as old as the hills, and the “haggling rug merchants of Istanbul or the teeming bazaars of Marrakesh.” Are these venerable institutions so different from the big box retailers and online discounters?

Well, yes, the author maintains. “The ancient marketplace was built on a balance of power between buyer and seller that is all but gone today. A cascade of corporate scandals and screwups from Enron to Haliburton to Citibank to Bernie Madoff’s audacious Ponzi scheme has shaken whatever faith we once held in corporate responsibility, and this mistrust has dripped down to the retail level.” As consumers we exact our “revenge” or get “our due” by seeking the maximum possible discounts on….everything.

But in the world of food production, or technological innovation, or furniture building, it is rarely the truly inventive, or quality-concerned, or creatively entrepreneurial company that can fuel massive discounts. It’s the big guys with dominant scale who can, temporarily, sustain such pressure. It’s only temporary. They too lose their R and D budgets, and their staff, and their basic viability too.

Ruppel Shell neatly illustrates her basic premise with this example from George Akerlof, a Nobel Prize winner in economics:

Gresham’s law: Bad money drives out good. “Imagine that a quart of high-quality milk wholesales for $1.00, and a quart of watered-down milk wholesales for 60 cents. A typical buyer might willingly pay up to 80 cents for the watered-down milk and up to $1.20 for the pure milk. In either case, mutual gains would be made from the transaction: Both the buyer and the seller know what he or she is getting, and both end up with what might be considered a fair deal. But if the customer is unable to distinguish quality, both grades of milk must sell for the same price–about 90 cents a quart. Under this system, honest brokers of pure milk go bankrupt, while corrupt watered-down milk sellers flourish. So logically enough, soon all surviving merchants are watering their milk and pocketing large profits, and consumers believe they are getting a bargain when in fact they are being ripped off.”

She concludes, “In American today, Gresham’s law rules, with sweeping consequences, both obvious and subtle. The way we shop, the way we do business, and the way we think about money all reflect this new reality.”

This, in a nutshell, is why discount culture terrifies me. And this is one reason I am devoting my professional life to creating a connection between products, their stories, and consumers.

One of the author’s examples of the degradation of our culture and product choices is the preponderance of cheap knock-off Native American jewelry and crafts at the tourist sites in Sedona. Here is an article from yesterday’s WSJ on this very same topic: http://online.wsj.com/article/SB125711476979321537.html

I recently started reading this book, but was put off because the author did not seem to be organizing her points clearly. She seemed to wander in several directions. Sometimes what’s wrong with “cheap” is that the product won’t last long. Sometimes the problem is that you buy things that you don’t really need, simply because the low price is attractive. Sometimes what’s wrong is that people enjoy shopping for its own sake. Sometimes the problem is that cheap goods are made by factory workers with boring jobs instead of skilled artisans. Sometimes the problem is that big box stores are putting local retailers out of business. These are entirely separate issues, but she seems to jumble them all together.

In “the boot incident”, to which she seems to give great weight, she went to a store, decided that she didn’t want to pay for the really nice boots, so she “settled for some Chinese imports selling for about one quarter the price. The boots were clunky and so uncomfortable that on New Year’s Day I tossed them to the back of my closet…”. Sorry, that does not sound like an incident from which I’d draw a profound lesson. Or perhaps more to the point, it doesn’t sound like an experience with which I personally empathize.

So, when she says “In these trying times, who but a hopeless elitist would suggest that low price is not an unassailable good?”, the answer depends on what she means. If you are paying a low price for something that works poorly and will break soon, that’s one thing. If you are getting a better price than you otherwise would have for a product that’s perfectly OK, that’s entirely different.

I read some of those same passages that you cite. When I read about how we spend 32 percent less on clothes, etc, I wondered, exactly what does that statistic mean? Who is “we” and is the population and its characteristics what changed, rather than the clothes? Are “we” buying exactly the same amount of clothing, and of the same quality, but spending 32 percent less for it, or are we buying less clothing? And where did this statistic come from, anyway?

I also have a bit of a pet peeve about people misusing “Gresham’s Law”; please see the Wikipedia article explaining what it really means. But ignoring the terminology, her point about the watered-down milk only holds, as she says, “if the customer is unable to distinguish quality”, which seems unlikely in this case. A better example would be gasoline, where you really don’t have any way to examine the product and know if it’s good, AND the problem that it results in cannot easily be traced to the cause; your car misbehaves and you have no way to know that it’s because the gasoline was tainted (in fact the problem might possibly not even show up until leter, after many tankfuls of good gasoline). Well, what do we do about that? At one time, gas pumps first moved the gasoline into a glass “fishbowl” on top of the pump so that you could visually inspect it. Visual inspection isn’t really good enough, so they stopped doing that. Now, there is state inspection. I don’t know all the details, but apparently in New York State, there is a fee of 5 millionths of a cent paid on gasoline by the dealers, which pays for a state inspection program.

When she says “In America today, Gresham’s Law rules, with sweeping consequences”, what does that really mean? How often are we in the situation where we cannot distinguish quality? When we can’t do it ourselves, we can often turn to third parties; I’m a huge fan of Consumers Union, the organization that runs lots of careful tests of products and publishes Consumer Reports. And one of the reasons I’m such a big fan of Daily Grommet is the same: I know you’ve actually checked out the product and I have come to trust the quality of your evaluations.

When she says that IDEA makes “fashionable, desirable, and even lovable objects nearly devoid of craftsmanship”, what does that mean? “Craftsmanship”, when applied to the object rather than the person, means “the skill, art, of work of a craftsman”. Is she objecting that the product wasn’t made by a skilled person, regardless of the properties of the product itself? Is she saying that it works poorly or will break after a short time?

The next sentence doesn’t clear it up: how does environmental impact relate to crafsmanship? Periodically, she wanders into making points about whether the “cheap” products are being made in a way that’s harmful to the environment, which is quite separate from the rest of what she’s saying, but she mixes it all up. The ways to address the envirnonmental issues are very different from the ways to address the other problems; it does no good to conflate them all.

What’s her point about “Most of us have absolutely no idea of what goes into setting a price”? Sure, that’s true. If you have ever been on the other side, as a seller, setting prices is very hard. I’ve been in lots of discussions about price setting, by people who are very smart and have to set prices all the time, and it’s clearly very, very difficult. I get the impression that she’s saying something to the effect that it’s unethical if prices aren’t set based closely on the cost of production; that’s not clear to me, and it’s also very hard to quantify cost of production given the differences between fixed and variable costs, how you take into account marketing and service costs, and many, many other factors.

Is it actually bad that Saks and Nordstrom “engaged in an orgy of price slashing”? The most basic economics teaches that the more competitive a market is, the more profits will tend to fall due to competition. Is that a bad thing? Is she advocating price cartels? Surely not; the point is that you can’t tell what she’s really trying to get at. That is, it’s not that I’m necessarily disagreeing with her point; it’s that I can’t tell what her point IS. This kind of sloppiness made it hard for me to get through the book. It’s a shame, because I think she did do some good research and make some good points. And a lot of the topics she’s dealing with are very important and need careful examination.

OK this is cool. A blog post comment that is way more developed and probably better than my original post. Thanks Dan!

You accurately point out that these rather grand assertions (I’ve quoted above) by the author are unsupported. But do remember I mainly excerpted her introductory chapter. She goes deeper on each of these points in the later chapters of the book. I took a risk in sharing her thesis, without the supporting structures. That’s not entirely fair to her work.

More basically, I think we come at this from really different orientations….you have a steel trap mind for the logic and solidity of an argument. (You went to MIT! You are a software engineer!) I deeply respect that. I know you care about the issues in the book or you would not bother devoting your mindspace to them. But it’s possibly a more intellectual response than I could muster, and entirely appropriate given that your career has been outside the consumer arena. I don’t mean that you can’t have well formed opinions and observations, but that they might be more personal than professional.

However, I come at this “debate” from an in-the-trenches perspective as a “product designer/marketer/concerned citizen.” That doesn’t mean I don’t need or appreciate real empirical evidence. But I have worked as a designer and as an executive and consultant in several manufacturing companies (computers, telecom equipment, footwear, toys, consumer electronics) and at a national retailer. I have seen the real-life results of these discount-driven shifts. I guess that is why I am more forgiving of the lack of empirical evidence, because I know so much of what Ruppel Shell asserts has been realized right in front of my own eyes.

Does that sound like I just put my hands on my hips and said, “I don’t care what you say. I just KNOW I am right!” ? 🙂

OK Dan the only way I can properly respond is to write a series of blog posts that share my experiences and observations on each of these points. (And to give the author the benefit of finishing her book!) I will do that….

I know what you mean. In fact, I’m not even complaining about the lack of hard data; I’m mainly bothered by the organization and lack of clarity in the presentation. I do think there’s too much stuff on offer that has low price but also low quality, or, worse, is actually deceptive.

What’s really frustrating is seeing people buy cheap stuff because they can’t afford the good stuff, and end up paying MORE in the long run because the cheap stuff doesn’t last and has to be replaced.

I guess her point about the boots is that we are vulnerable to a bait-and-switch, where the good product gets us into a “wanna buy something!” mind set, but then we can’t afford or don’t want to pay for the good product because it’s very expensive, so we end up making an unwise purchase of cheap stuff. I can see that, and it’s certainly a bad thing.

Recommendations by people who have examined products, and whom we can trust, are so important! Consumer Reports is great; I wish more people paid attention to them and supported what they’re doing. For high-tech products, I trust David Pogue in the NY Times, and cnet.com. And, as I said, Daily Grommet, of course.

Wow! I read Jules’ entry via email, and was prompted to respond here–now feel a little less prepared in light of the last entry. I haven’t read the book, but am highly interested now.

I am an artist and the pursuit of outstanding craftsmanship is what gets me out of bed seven days a week. For years, I had the luxury of buying expensive materials and tools to create my pieces, and selling them at gut-generated prices. The return I sought was acknowledgment and appreciation of my craft. I got it, and that was enough.

When I had to leave my decently paying day job, I turned my art into a business. I don’t expect to pay any bills with Scarlet Robin money for a good long while, but the nature of creating has changed. Setting prices was INCREDIBLY difficult, and there is tremendous pressure in marketplaces like Etsy to keep prices ridiculously low.

I’ve raised my prices so that when I accidentally melt a piece of silver, I don’t feel sick that I’ve just used every penny of the sales price to pay for another. After working as a professional for 15 years, I came to expect respect for what I do. Even though our culture doesn’t necessarily confer that same level of respect on studio artists, I’m choosing to require it for myself.

As a consumer, I’m much happier about spending $40 for the cardboard castle (Grommet!) we bought for our son the other day, instead of a $30 plastic version. Authenticity feels good. Even though our family of 4 now lives on one teacher’s salary, we are thoughtful in our purchases. I know I’m not the only one who would rather have 5 excellent things, than 20 mediocre ones.

Phew Jen…reiniforcements…thanks! (Kidding…I love Dan’s comment too.) I think it is really helpful to hear the real-life stories from people who live with the consequences of discount culture. You did that so eloquently.

I really like your point of having five excellent things instead of 20 mediocre ones.

As much as I appreciate Target’s improving the aesthetics of value shoppers across the country with their “design for everyday living”, I find the democratization of design to be a risky proposition.

Aesthetics are only part of design. Problem solving is an important aspect of the creative process particularly to create customer value. People are more attracted long term to products at har both pleasing AND improve the quality of their lives. Designing just to reflect trends or to add styling is the equivalent of producing junk food, empty calories that taste good in my mouth but do nothing for my body.

The availability of cheaply manufactured goods makes it easier than ever for designers and producers to get lazy, and only iterate on established themes or styles. It may appear that design matters, but the design only mattered on the surface. In your hand the product may cheap, unbalanced or fragile.

Pride of craftsmanship needs to be designed into the entire customer experience, otherwise design becomes merely style without substance.

I just recently finished Cheap, and I agree that for the vast part of the middle of the book I felt very much the same as Dan. By way of disclosure, I have a tech. and design background, and am developing a web-project to make consumers aware of other aspects of products beyond price.

The argument against cheap goods is not obvious or simple, and so I was looking for a well researched and well thought-out approach to the topic. During the middle portion of the book I kept asking myself “so, what’s wrong with that?”. I agree that the book is scattered in its approach to making its case, and even makes a couple of significant errors. For example in its discussion of the pricing of “inelastic” goods, I was hoping the author would have found the killer argument about why cheap isn’t better for most consumers after all. Instead, there’s a typo that turns the author’s argument on its head (though I’m sure most reader’s eyes will be sufficiently glazed not to notice). More importantly, the data cited suggests that discounters do exactly what you’d expect any market to do when pricing these goods (i.e no nefarious use of monopoly purchasing power to create loss-leaders that harm consumers).

Similarly for the argument that while jobs are shifted to low-cost “labor producers” (which is a pretty interesting way of describing human beings), there is no solid argument about why this is “wrong”. Poor people in other countries deserve the benefits of economic activity just as much as anyone else, and shifting jobs there is not, in itself, an evil thing.

I think the book redeems itself in the final two or three chapters, where some synthesis is attempted. The persuasive points for me were

1) When low-cost labor comes from counties that lack a rule-of-law, the rising economic tide does not lift all boats, as is the lore of creating the middle class in the U.S.. Many of the countries from which the market extracts labor (and other resources like oil and minerals) lack a rule of law. It’s not that these countries currently lack labor and environmental regulation, since economists will argue that once worker’s basic needs are met, they will begin to value these “amenities” and purchase them with the price of their own labor (as has been done in developed counties). The problem is that in these counties there is no political economy that allows workers to create this change. The value of this kind of un-democratic political economy to extractive industries is well study in the environmental justice literature (see, for example, Unocal’s Burma operation).

2) In the absence of other information about products, cheap sucks the middle out of the market, creating only basic products and “elite” products with nothing in-between. Dan’s point about consumers being informed about the quality of goods is important here, I think. Yes, there are information sources like Consumer’s Union, and yes that’s what I love about Daily Grommet as well. However, the consumer market has been on a several-generation long journey to divorce consumers from any knowledge of how their products are produced. If you look at the interior design of WalMart and other discount stores as a visual designer, you’ll see that the largest and most distinctive features of the visual landscape (after basic navigational aids like “Mens Clothes” and “Automotive”) are the prices of goods. My favorite example of this is the way we package food. Meat, laid out on styrofoam, wrapped in cellophane, with two pieces of information “this is a chuck steak” and “the price is $x/pound”. This “cleaning up” of the consumer market was one of the great innovations of the 1950s (no-one really wants to see the sausage being made), but it does come at a cost, an information cost. So with no information that one garment might be better made than another (and thus last longer and be cheaper in the long-run) the consumer is left to choose solely on price. Or, the consumer can shop for exclusive and significantly more expensive brands, but it is still not clear that these are of higher quality (beyond their status value).

To Dan’s question about consumer’s spending less on clothing. Juliet Schor at B.C. has done some excellent scholarly work on this, and the fact is that we (the American consumer) are purchasing more articles of clothing per year now, and are spending less on them. Now it’s still possible that these are perfectly high-quality articles of clothing, but simple observation and experience will put that argument to rest. People may not “want” clothes that last because they go out of fashion before they fall apart, but it is certainly true that it is more difficult now to find well made clothing than it was a generation ago. Clothes are less expensive, less well made, and more disposable. If that’s what consumer’s want (rather than what they’ve been taught) then we are in for a rough ride ahead.

I’ll leave out a discussion of environmental impacts as a cost of goods not reflected in their price (externalized as the economists would say), and will agree with Dan that this argument is never fully formed in the book.

I agree that Cheap was frustrating in the middle, but I think it does end with some useful and thought-provoking ideas. For those of us working in the area of serving and creating the more completely informed consumer, the battle cry of the final chapter is clear. Nothing will change until consumers create a market for it, and I think that Daily Grommet, our humble project and many others can pave the way for that kind of change.

Thanks so much for the thoughtful explication of the bowels of the book “Cheap”, and its partially redemptive close. Your analysis will be really helpful to get people through the wilderness of the middle of the book without losing the major compelling points of the argument. I really appreciate the rule-of-law argument against distributing production willy-nilly across the globe. I don’t see that articulated much in the US, where we just assume that personal boostrapping to success is a basic right and expectation for all people. Not so, as you and the author explain.